Graduates, avoid this common financial mistake
Tens of thousands of students will complete their studies this year in Australia. Graduation is a rite of passage into adulthood. But it also marks the moment when people face huge decisions about money and investment – often when only in their 20s.
The financial options can be overwhelming. Many graduates delay financial decisions and planning. It is understandable, particularly in light of the astonishing increase in property prices across much of Australia.
But waiting until your 30s to make such decisions can increase risk. And you can forfeit some potential gains.
The amount of advice can also be overwhelming, whether it be from family, friends or other sources. Some of this guidance may be very sensible. But there is also one simple and powerful thing that you can do to build a nest egg that grows exponentially.
More Australians are studying
Before we get to that tip, consider this: more people are studying than ever before. This affects our chances to earn – and invest.
One in five Australians aged 15 to 64 is enrolled in a university or vocational course, according to the Australian Bureau of Statistics. Around 40 per cent of 25-34 year olds now have a Bachelor degree or higher. In 2014, domestic university enrolments exceeded one million for the first time.
Students are also taking longer to complete their courses. A third of Australian university students will not complete their degree within six years, according to the federal Department of Education.
Of even more concern is that one in four students had not completed their course nine years after starting. This means it is taking longer to start building a nest egg.
Get in the habit of saving
The median starting salary for bachelor degree graduates under 25 years, is around $54,000 for a full-time job. Income tax will reduce this amount by almost $10,000. The temptation is then to spend the remainder.
“Many people, especially graduates working for the first time, make the mistake of spending now and saving later,” Sandra Lau, an HSBC Senior Financial Planner, says. “This can become a pattern that is difficult to change. Delaying saving can also have a significant impact on your future wealth as you are forfeiting potential gains from the power of compounding interest.”
When we first start out in our careers, we need to be aggressive with our investing. This starts simply with a commitment to put away money each month for long-term savings.
Lau adds: “It is important to invest those long-term savings across a range of different asset classes, according to your risk tolerance. At the same time, you need to also minimise any costs associated with those investments, including fees and taxes.”
The incredible power of compounding
It is critical to start a savings habit as soon as possible. Simply putting aside regular savings in a high-interest savings account, and reinvesting the interest, is the top thing that graduates can do once they start working.
By doing so, you can benefit from the power of compound interest. In other words, you earn interest on the money you deposit, and on the interest you have already earned. In effect, you earn interest on interest.
The average cash rate between 1982 and 2015 was 7.8%. As an example, if you save $500 each month in a savings account that earns 4.0% interest, reinvesting the interest, this could grow to over $257,000 after 25 years (excluding any taxes or fees). Over $100,000 of this would be in the form of interest. The figure would be even more if you saved on a weekly, rather than monthly basis.
On the initial 25-year calculation, if you postponed your savings habit by five years, the final amount drops by almost a third to around $183,000. If you postponed saving for 10 years, the amount drops to around $123,000.
“Postponing your savings may be one of the biggest financial mistakes you can make,” Lau says. “You may wake up one day, having worked hard and long, but with very little or nothing to show for it.”
She adds, “It is important to have a comfortable lifestyle. But, it is just as important to begin the savings habit from the day your start working. Even starting small, and saving $10 or $20 each week, can make a real difference.”
This article doesn’t take into account your objectives, financial situation or needs. You should consult appropriate professionals or experts before making any financial decisions. This article’s content or any copy of it cannot be altered in any way, transmitted, copied or distributed to any other party, without the prior written permission from HSBC. Issued by HSBC Bank Australia Limited ABN 48 006 434 162 AFSL 232595.